Concepts of National Income

I. Gross Domestic Product (GDP): 

It is the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices. Dernberg defines GDP at market price as “the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.” 

There are three different ways to measure GDP: Product Method, Income Method and Expenditure Method. These three methods of calculating GDP yield the same result because.
National Product = National Income = National Expenditure.

Methods to Measure GDP 

1. The Product Method: 

In this method, the value of all goods and services produced in different industries during the year is added up. This is also known as the value added method to GDP or GDP at factor cost by industry of origin. In other words, it is the sum of gross value added.

2. The Income Method:

The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.

3. The Expenditure Method:

This method focuses on goods and services produced within the country during one year which includes: Consumer expenditure on services & durable & non-durable goods (C), Investment in fixed capital such as residential & non-residential building, machinery, and inventories

(I), Government expenditure on final goods & services (G), Export of goods & services produced by the people of country (X) & Less imports (M). 

Thus GDP by expenditure method at market prices = C+ I + G + (X – M), where (X-M) is net export which can be positive or negative.

II. Gross National Product (GNP):

It is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad.

GNP includes four types of final goods and services:

i. Consumers’ goods & services to satisfy the immediate wants of the people. 

ii. Gross private domestic investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods

iii. Goods and services produced by the government; and

iv. Net exports of goods and services, i.e., the difference between value of exports & imports of goods and services, known as net income from abroad.

III. Net National Product (NNP): 

In the production process, certain amount of fixed capital is used up. This is called depreciation of fixed capital or consumption of fixed capital. By deducting the value of depreciation from the value of GNP in a year, we get another measure of output called Net National Product (NNP). Hence 

NNP = GNP –  Depreciation , Further  

NNP at market price = GNP at market price – Depreciation = NI at market price

IV. National  Income (NI):

In the production process, certain amount of fixed capital is used up. This is called depreciation of fixed capital or consumption of fixed capital. By deducting the value of depreciation from the value of GNP in a year, we get another measure of output called Net National Product (NNP). Hence 

NNP = GNP –  Depreciation , Further  

NNP at market price = GNP at market price – Depreciation = NI at market price.

Or, National Income(NI) = Net National product + Subsidies – Indirect taxes. 

V. Personal  Income (PI):

It is the sum of all incomes actually received by all individuals or households   during a given year. However , all income earned by a person does not constitute personal income. It only refers to the income received by the individuals. Hence

PI = NI – corporate taxes, undistributed profits & valuation adjustment – social security contribution + Transfer payments to persons + personal interest income

VI.   Disposable Income (DI): 

The entire amount received by the individuals & households are not available for consumption expenditure because some part of the personal income should be paid to the government in the form of personal taxes. Hence 

Disposable Income =  Personal Income – Personal taxes 

i.e.,  DI = PI – Direct taxes

VII.   Per Capita Income (PCI): 

PCI of a country usually refers to the average earning or income of individual  in a particular year & calculated as: 

(PCI)    =     Current National Income 

Current Total Population

Per Capita Income of the people is useful to compare people’s standard of living in different countries.